ISDA Publishes EU Guarantee of Origin Annex
In Short
The Situation: Demand for standardized documentation to support trading in EU guarantees of origin has grown alongside the desire in the public and private sectors to reduce carbon emissions and transition to cleaner energy.
The Development: The International Swaps and Derivatives Association ("ISDA") is launching and publishing the ISDA EU Guarantee of Origin Annex ("ISDA GO Annex").
Looking Ahead: The ISDA GO Annex establishes a standardized framework to enable market participants to efficiently transact in EU guarantees of origin under ISDA documentation, either on a standalone basis or bundled with financial power purchase agreements.
ISDA is publishing the ISDA GO Annex to enable market participants to efficiently sell and purchase EU guarantees of origin, either on a standalone basis under the ISDA Master Agreement, or bundled with the ISDA Global Financial Power Purchase Agreement Confirmation Template ("FPPA Template") via the ISDA Global FPPA Optional Attachment (ISDA GO Annex) ("GO Optional Attachment").
The ISDA GO Annex builds on the success of the contract documentation published by ISDA for renewable energy, including the FPPA Template and the ISDA U.S. Renewable Energy Certificate Annex ("REC Annex"). Jones Day has previously advised ISDA on the FPPA Template and the REC Annex and has now advised ISDA on the preparation of the ISDA GO Annex and the FPPA GO Optional Attachment.
What the ISDA GO Annex Covers
The ISDA GO Annex relates to guarantees of origin ("GOs") under both Directive (EU) 2018/2001 on the promotion of the use of energy from renewable sources and the Electricity Scheme of the European Energy Certificate System (“EECS”) Rules, which are set by the Association of Issuing Bodies to harmonize the issuance, transfer, and cancellation of GOs at the EU level.
The GO is defined under the Directive as an electronic document which has the sole function of providing evidence to a final customer that a given share or quantity of energy was produced from renewable sources.
The ISDA GO Annex, whose core mechanics are aligned with the EECS Rules, is designed to function as an industry standard template for national or cross-border physically-settled transactions in GOs, including spot and forward sales, as well as options, under the ISDA Master Agreement.
The ISDA GO Annex provides robust standardized definitions and contract terms to allow parties to deliver GOs either through a transfer of GOs from seller's account in the applicable GO registry to buyer's account in the same or another GO registry, or through a cancellation of the GOs by seller on behalf of buyer.
To address the specificities of GO trading, a failure to deliver or receive GOs does not constitute an event of default under the ISDA Master Agreement and is addressed by tailored remedies, whereby the failing party will pay an amount based on the difference between the market price and the contract price. At the parties' election, persistent failures to deliver or receive GOs may constitute an additional event of default or an additional termination event.
Force Majeure is addressed through specific provisions that apply in lieu of the standard force majeure provisions of the ISDA Master Agreement. The definition of Force Majeure in the ISDA GO Annex is elective, with a pre‑printed definition that expressly includes disruptions to the applicable GO registries, the EECS infrastructure, and the banking system, with elective provisions to enable additional tailoring, which could potentially include listing specified weather events or other circumstances outside of a party's control. An extended Force Majeure constitutes an additional termination event in respect of the affected GO transactions and, at the parties' election, results in either termination at no cost or determination of a termination amount on a mid‑market basis.
Like the REC Annex, the ISDA GO Annex employs a modular design through elective provisions and the possibility for parties to include additional provisions to tailor transactions to jurisdictional requirements and entity-specific needs. Parties may, for instance, add or vary the applicable representations and warranties, specify additional national requirements, or add provisions for which there is no standardized approach, such as provisions relating to change in law.
FPPA Template Integration via FPPA GO Optional Attachment
The FPPA GO Optional Attachment supplements the FPPA Template to facilitate bundling of GO deliveries with FPPAs relating to EU production devices. The attachment incorporates the ISDA GO Annex into the FPPA Template, in order to apply the ISDA GO Annex mechanics to the GOs issued or to be issued in connection with the underlying FPPA transaction, and provides specific elections and amendments. Consistent with a similar optional attachment for the ISDA REC Annex ("FPPA REC Optional Attachment"), it modifies the provisions of the ISDA GO Annex as needed for FPPA transactions, such as those relating to a failure to deliver or receive the GOs or Force Majeure.
The Bigger Picture
The ISDA GO Annex and the FPPA GO Optional Attachment supplement and build on the success of prior ISDA documentation, such as the FPPA Template, REC Annex, and FPPA REC Optional Attachment, and establish a strong foundation for the standardization and further growth of GO transactions.
See the ISDA GO Annex and the ISDA Global FPPA Optional Attachment (ISDA GO Annex)
Three Key Takeaways
- ISDA is publishing a standardized documentation that establishes common terms for physically-settled GO transactions, aligned with the EECS framework and easily adaptable to local jurisdictional and entity-specific requirements.
- The standardized terms of the ISDA GO Annex and the FPPA GO Optional Attachment will streamline negotiations and enable market participants to more efficiently enter into GO transactions and EU FPPAs.
- ISDA may build on the existing ISDA GO Annex and REC Annex to develop new ISDA documentation that can be utilized with the FPPA Template, if so desired by market participants.
